David Moenning's Daily State of the Markets: 8/13

The Taffy's Too Good

Here's a link to listen to an Audio Version of the report:

Although I did spend one summer making taffy by hand at Penny P. Patrick’s Praline Parlor at Six Flags Great America in beautiful Gurnee Illinois, the taffy I'm referring to in the title of this morning’s missive is not of the culinary variety. No, the Taffy we’re talking about here is the nickname for the Fed’s Term Auction Facility (TAF).

The Fed’s Taffy is a relatively new credit treat which was introduced during the height of the credit crisis this year. The TAF is designed for those banks and brokers who need cash desperately, but are either not able or are too embarrassed to get money from the Fed the old fashioned way. In English, the TAF is a new version of the Fed’s discount window, where banks and now big brokers, can exchange those worthless mortgage-backed securities for cold, hard cash.

One of the arguments people have made recently to suggest that we’ve seen the worst of the credit crisis was that the Taffy auctions have not been particularly well attended lately. Thus, the thinking has been that the liquidity crisis is beginning to wane. Never mind the fact that credit and lending standards have continued to tighten; the idea that banks are not as desperate as they had been was viewed as a good thing.

Well, until yesterday, that is. Tuesday’s $25Billion term auction offered by the Fed garnered $54.8 Billion in bids from a total of 64 banks. This represented the largest amount of interest since the end of February. In addition, the interest rate came in at 2.754%, which, while just a smidge below the current Libor rate, suggests that US banks continue to have problems with liquidity.

It also didn’t help yesterday that Minneapolis Fed President Gary Stern said that the Fed will need to act before the economy is healed. Stern said that the Fed will have to be proactive with respect to its forecasting because waiting too long to focus on inflation could create problems.

So, despite another drop in crude oil, the realization that the banking system is still not exactly running smoothly caused stocks to take a hit yesterday. The financials were hit especially hard as the BKX dove -6.3% with names such as Wachovia (WB) and JP Morgan (JPM) losing more than 9% apiece.

However, after the nice run higher, which included a breakout above the resistance zone, a pullback was to be expected. Thus, the pressure will now be on the bulls to make sure that the ‘old resistance’ becomes ‘new support.’

Turning to this morning, the truce in Russia didn’t last long as troops are moving further into Georgia. On the economic front, the first estimate for Retail Sales in July fell by -0.1%, which was below the expectations for an increase of +0.2%. And when you strip out the sale of autos, the numbers were also a bit light at +0.4% vs. the consensus for an increase of +0.6%.

Running through the rest of the pre-game indicators, foreign markets followed Wall Street lower across the board. Crude futures are moving up with the latest quote showing oil trading higher by $0.69 to $113.70. Interest rates are down this morning with the yield on the 10-yr currently trading at 3.89%. And finally, with about 60 minutes before the bell, stock futures in the U.S. are pointing to another lower open. The Dow futures are currently off by about 50 points; the S&P’s are down by about 6 points, while the NASDAQ looks to be about 2 points below fair value at the moment.

Stocks “In Play” This Morning:

Yesterday’s Earnings After the Bell:

Applied Materials (AMAT) – Reported $0.14 vs. $0.14
Kinross Gold (KGC) – Reported $0.09 vs. $0.11
Nvidia (NVDA) – Reported $0.13 vs. $0.17

Today’s Earnings Before the Bell:

Brocade (BRCD) – Reported $0.16 vs. $0.14
Deere (DE) – Reported $1.32 vs. $1.36
Liz Claiborne (LIZ) – Reported $0.09 vs. $0.00


News, Upgrades/Downgrades/Brokerage Research:

Applied Materials (AMAT) – Target reduced at Bank of America
Toll Brothers (TOL) – Initiated Buy a Citi
Pulte Home (PHM) – Initiated Buy a Citi
Longs Drug (LDG) – Upgraded at Credit Suisse
Emulex (ELX) – Upgraded at Goldman
Gold Fields (GFI) – Downgraded at Merrill
Level 3 Communications (LVLT) – Downgraded at Oppenheimer

Disclosure: Mr. Moenning and/or related firms hold long positions in: AMAT

Note: All earnings reports compared to Reuter's consensus estimates

** For More of David Moenning’s Market Analysis, Stock Portfolios, and Trading Ideas, visit: www.TopGunsTrading.com

The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management and Co-Founder of TopGunsTrading.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.


David D. Moenning
Heritage Capital Management
Main: 630-250-4700
Direct: 303-670-9761
email: [email protected]

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